The price of the most important of the base metals – copper – recently touched the lowest level seen since July 2009 at $2.50 per pound.

This economically sensitive metal’s drop of 14% by the end of last year has caused speculators to jump on the downward bandwagon.

Futures contracts betting on further falls for copper are at multi-month highs on the London Metal Exchange. Even the Shanghai Metal Exchange has seen similar contracts jump by 180% since the start of December, says the Financial Times.

The decline is being fueled by the expected slowdown in the Chinese economy, which accounts for 45% of global demand and a forecasted increase in mine supplies this year and next.

So the continued drop in copper prices is a lock, right?

Unreliable Copper Supply Forecasts

Not so fast… Wall Street’s estimates of a supply surplus may be way off base.

So says mining giant Glencore PLC (GLNCY). The company is the world’s biggest supplier of copper.

Glencore says the forecast surplus in 2015 is very small and, based on past history, very likely subject to downward revisions. The company has also stated that it wouldn’t be surprised to see an actual deficit in 2015.

Such revisions are common. For example, in 2014, the International Copper Study Group lowered its copper supply forecast by 700,000 metric tons (mt) within six months. Its forecasted surplus for copper quickly turned into a deficit.

Even if there is a surplus of copper over the short term, the longer-term outlook is positive for prices. One reason for that outlook is the increase in demand form the developing world.

Rio Tinto PLC (RIO) told the Financial Times that to meet global demand over the next decade, the industry “will have to add the equivalent of a new Escondida [mine] every 15 months.” Escondida is the world’s largest copper mine and produces 1.2 million mt a year. It is jointly owned by BHP Billiton (BHP) and Rio Tinto.

First Quantum Minerals (FM.TO), a mid-sized miner, told the Financial Times that if China, India, and Brazil were to reach the same level of copper use as Europe by 2020, another nine Escondidas would be needed!

With budget-constrained mining companies cutting back sharply, adding more mines is clearly not in the cards.

Even the highly anticipated Resolution mine in Arizona will not be able to help out the market, at least for a while. Permitting for that massive copper mine is expected to take another five to seven years.

With regard to Escondida itself, output will start to decline in 2016 as BHP is forced to mine lower grades of ore, due to the nature of the formation.

BHP says it may be able to gain access to higher grades there, but not until at least 2020.

The Demanding Chinese

On the demand side, many copper bears are saying the Chinese slowdown will dampen overall, consider this:

Caroline Baine, a senior commodities economist at Capital Economics, pointed out that China’s copper usage is coming from a higher base.

Baine explains that a 9% demand increase in 2004 resulted in a 280,000-mt rise in copper usage. A similar 9% increase in demand in 2013 led to a 800,000-mt increase in copper usage.

What that means is that even if the Chinese economy slows to only 7% growth this year (the lowest since 1990), the rise in annual copper demand from China will still be higher than it was a few short years ago.

With clearly constrained supplies in the near future, the market will get tight and support higher prices. All of the large copper mining companies will obviously benefit from this.

And if a “white swan” appears for the copper market in the form of the China State Grid, look out for copper to become red hot. That entity has about $71 billion to spend on upgrading the nation’s grid – a copper-intensive undertaking.

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